The central bank’s quarterly monetary policy report revised activity and inflation higher, while signaling a rate path that is above analyst expectations. The central bank’s technical staff revised its 2023 GDP growth forecast up by 80bps from the previous report to 1.0% (7.5% in 2022) and maintained the 1.0% growth forecast for 2024. The 2023 yearend inflation forecast was also revised up by 75bps to 9.46% (13.12% last year) and to 3.45% for 2024 (-5bps). Regarding monetary policy, the staff’s baseline scenario implies a policy rate trajectory on average somewhat above the central bank’s analyst survey expectations (11.25% by yearend and 7.0% by the end of 2024, with cuts beginning on the fourth quarter of this year). Additionally, the technical staff maintained the estimated neutral rate in 2.2% for this year and 2.3% in 2024 (2.0% last year), despite elevated policy uncertainty, large domestic imbalances and higher risk premium. The 1-year ex-ante real policy rate now stands at 6.25%, sitting in a contractionary territory.
Output gap remains positive this year (as opposed to slightly negative in the previous report). Potential growth was revised up to 3.1% from 2.8% for 2023 and up 20bps for 2024 to 2.6%.
Inflation expectations revised to the upside. The 2023 inflation estimate was revised up by 75bps to 9.46% due to a slower-than-expected moderation of food prices, stronger minimum wage indexation pressures, COP weakness and the gradual increase observed in fuel prices throughout the year. Core inflation is expected to reach 8.9% this year (+18bps from January’s Outlook). For 2024, the technical staff expects inflation at 3.45%, nearing the 3% target (analyst survey expectation: 5%). Inflation forecasts do not consider the materialization of an “El Niño” phenomenon this year.
Despite expected CAD correction, economy remains vulnerable to external shocks. The technical staff expects the CAD to narrow to 4.1% of GDP this year (+20bps from the previous report), from the 6.2% registered last year. The narrowing is aided by the domestic demand adjustment through a drop in imports and a reduction in FDI profits.
We believe the tightening cycle likely ended, in line with our call that inflation peaked in March. However, the Board is leaving upcoming rate decisions dependent on incoming data, risking additional hikes in the short-term and reducing the probability of rate cuts this year.
Joao Pedro Resende